1996
—
Public Service

Corporate takeover

Hundreds of contract farmers make up a franchise system runby a few big companies. Meanwhile, traditional hog farming is fading.

A Murphy Family Farms feed mill towers over Duplin County. A symbol of the shift to corporate farming, themill produces 15,000 tons of feed a week and has its own railyard.
(N&O photo by Robert Willett)

CLINTON -- Greg Stephens is the 1995 version of the North Carolina hog farmer: He owns no hogs.

Stephens carries a mortgage on four new confinement barns that cost him $300,000 to build. The 3,000 hogs inside belong to a company called Prestage Farms Inc. Prestage simply pays Stephens a fee to raise them.

For the next 10 years, most of Stephens' earnings will go toward
paying off his debt. Then, if all goes well, he can start making
money -- enough, he hopes, to put his kids through college.

The arrangement is called contract farming, and it's hardly risk-free.
But for anyone wanting to break into the swine business these
days, it's the only game in town.

"Without a contract, there's no way I'd be raising hogs,"
said Stephens, of Clinton. "And even if I had somehow gotten
in, my pockets aren't nearly deep enough to let me stay in."

Welcome to corporate livestock production, the force behind the
swine industry's explosive growth in North Carolina. The key players
are big companies like Prestage, Carroll's Foods and Murphy Family
Farms.

The backbone of the new system is a network of hundreds of contractors
like Stephens, the franchise owners in a system that more closely
resembles a fast-food chain than traditional agriculture.

Nowhere in the nation has this change been as dramatic, or as
officially embraced, as in North Carolina. As a result, the hog
population has more than doubled in four years, and nearly all
of that growth has occurred on farms controlled by the big companies.

Meanwhile, independent farmers have left the business by the thousands.

With this story:

Iowa fears. In the country's top hog-producing state, farmers are banding together to ward off the kind of changes that North Carolina has seen.

Bigger family. North Carolina's biggest hog companies often refer to themselves as "family" farms, and in at least one sense the term is accurate: They're all related.

While Midwestern states debate the merits of increased hog production
against the loss of independent family farms, North Carolina's
government and land-grant university have promoted and encouraged
large-scale production for years.

No less an authority than state Agriculture Commissioner Jim Graham
believes the corporatization of agriculture is inevitable.

Opponents, however, say the corporations have created a perfect
system -- for themselves. They say the hog companies are saddling
hundreds of small farmers with huge debts, with no guarantees
that they will ever reap the kinds of profits they were promised.

"Why invest your capital when you can get a farmer to take
the risk?" asked former state Rep. Joe Mavretic, an advocate
for stronger legal protections for contract farmers.

"Why own the farm when you can own the farmer?"

Risky business?

If you want to know how popular hog contracts have become in North
Carolina, just call any of the big hog companies and try to get
one. Murphy and Prestage say they have yearlong waiting lists.
Carroll's says the wait can be as much as two years.

With tobacco facing an uncertain future, many farmers are jumping
at the chance to diversify their income and bring in steady earnings.
Others see the contracts as an investment or a way to break into
the livestock business.

Wendell H. Murphy, founder of Murphy Family Farms and the man
generally credited with adapting the contracting concept to hog
farming, describes the achievement as his greatest contribution
to the industry.

"These contracts are very good for the growers, and they
work good for the integrators," Murphy said in an interview.
"It's just been a strong economic boost to the region."

To Stephens, the biggest selling point is freedom from risk. When
pork prices go south, as they did two months ago, contract farmers
are barely affected.

"The company that owns the pig takes on more risk than you
do," Stephens said.

But others say the opposite is true: The growers are putting their
homes and property on the line, and they're also legally reponsible
for environmental problems and lawsuits from neighbors.

"The contract looks a whole hell of a lot better when they're
presenting it than the actual value is," said Jack Sauls,
a former contract farmer from Faison. "It's a good deal for
a man who doesn't have any money and can't borrow the money. You
give him a string to hold onto, and he thinks it's great. And
it turns out to be a wonderful deal -- for the company."

The risks are real, according to Kelly Zering, an N.C. State University
agricultural economist and a widely recognized expert on the state's
swine industry.

A typical hog contract farmer borrows anywhere from $200,000 to
$1 million to construct his barns -- a loan that's typically secured
by his house and land. But while the grower carries the debt for
the seven to 10-year life of the loan, the hog company can pull
out with 30 days notice. Zering says contracts for raising pigs
usually run for only a year, and contain an exit clause that allows
either side to cancel much earlier.

"I encourage anyone who considers a contract to consider
what they will do with these facilities in the event they lose
the contract," Zering said. Once that happens, the grower's
only real options are to try to find another company or lease
his property to someone else.

Zering says the contract grower can make a "very high level
of income" once his mortgage is paid. But his research shows
that most barns have a maximum lifetime of only 15 years. The
equipment, Zering says, will probably last about half that long.

Meanwhile, while the debt is being repaid, a grower will gross
about $9.50 per hog sold, Zering said. After paying his debt service
and expenses, the farmer is left a small amount of money for labor
-- roughly $7 an hour -- and an additional income of about 50
cents a hog.

"There's not a huge profit margin there," Zering said.

Some contract farmers complain that they didn't make any money
at all. John Cooper, a Newton Grove farmer who has worked under
contract for three different companies, said he was lured into
the business with promises of up to $100,000 a year. But after
making $56,000 in annual payments on a $750,000 loan, he ended
up taking a loss of $8,000 in his first year.

"I would tell people that each and every contract should
be looked at carefully, and nothing should be taken for granted,"
said Cooper, who says he is happy with his new company, Southern
States.

The author of a new book on contract farming agrees.

"People generally don't ask you to go borrow $150,000 to
get an $8-an-hour job," says Neil D. Hamilton, director of
the Agricultural Law Center at the Drake University Law School
in Des Moines, Iowa, and author of "A Farmer's Legal Guide
to Production Contracts."

"These relationships shift an awful lot of risk to the producer
-- the risk of owning the building, the risk of environmental
damage, the risk that the contract won't be renewed," he
said.

At the request of The News & Observer, Hamilton reviewed five
North Carolina hog contracts that were obtained by the newspaper.
His impressions:

The North Carolina contracts were "fairly standard"
for the industry and illustrated the general premise of the book:

"Whoever wrote them," he said, "wrote them to take
care of themselves."

No legal protections

The changes that are sweeping the swine industry today were pioneered
by chicken and turkey growers in the 1960s and '70s. Total confinement
housing, vertical integration and contract farming are all standard
practices in the feather world.

As a result, you need only look at chickens to see where pork
is headed:

The poultry industry today is fully integrated -- meaning a handful
of companies control all phases of production -- and the labor
is performed by an army of contract growers, some of them decidedly
unhappy.

"It's sharecropping -- that's what it is," said Larry
Holder, a chicken farmer and president of the N.C. Contract Poultry
Growers Association.

Holder's group is pushing for legislation that would give farmers
some protection from being squeezed or suddenly cut off before
their debts are paid. These rights have long been granted to auto
dealerships and similar franchise operators. But swine and poultry
growers won't be getting them any time soon -- not if the major
livestock companies get their way.

"I don't know that we need legislation to protect people,
or to mandate business decisions," said Walter Cherry, director
of the N.C. Pork Producers Association.

Cherry's group was one of the leading opponents two years ago
when state Rep. Mavretic and Sen. Roy Cooper introduced legislation
that would have provided legal safeguards for poultry growers.
After an intense lobbying campaign, the bill was killed in the
Senate Agriculture Committee.

Swine company officials say the protections aren't needed, and
they stand by their relationships with their growers. Murphy says
with pride that none of his contract growers has failed financially
-- although several have left his company to work for others.

"When we make a commitment, I'm going to stand there and
fight to honor that commitment," Murphy said.

Many of the contract hog growers interviewed had nothing but praise
for their company. George Garner, a Kenansville farmer, has raised
pigs for Carroll's Farms Inc. for 10 years.

"They've been nothing but good to me," Garner said.

But with so much at stake, contract farmers shouldn't have to
simply rely on their company's word, proponents of increased regulation
say. In the poultry industry, there has been an explosion of lawsuits
by contract farmers, some of which resulted in multimillion-dollar
damage awards after poultry companies were found to be defrauding
growers.

Late last year, Goldsboro Milling, a major producer of turkeys
and hogs, offered turkey farmers a cash settlement after being
accused in a lawsuit of systematically cheating them on weight
for five years.

At least a dozen other lawsuits are pending in Southern states
from growers complaining of a wide range of abuses, including
unfair termination of contracts, new equipment requirements at
the growers' expense, and underweighing of animals and feed.

Mavretic said he believes the problems will continue until contractors
are given legal protections by their governments.

"Here is the legislative problem that we refuse to acknowledge:
Why is North Carolina such a great state for the poultry integrators,
and why has it become such a great state for a few major hog producers?"
Mavretic asked. "The answer is, because our laws are so lax
that they allow the major integrators to exploit the contract
grower."

A dying breed

There's a twist to the pork statistics coming out of the state
Agricultural Department, one that is sometimes overlooked: Despite
the phenomenal growth in hog production here, the number of hog
farmers is dropping -- rapidly.

Since 1983, about the time corporate hog production was just starting
to ignite, more than 16,000 North Carolina hog farmers have left
the industry -- roughly two-thirds of the 23,400 growers who were
in business at the time.

Some, like Sampson County farmer W.E. Warren, are closing down
for good.

Others -- producers like Norman Denning, chairman of the Johnston
County commissioners and a 54-year veteran of the pig business
-- are cutting back.

"It's just a matter of who hangs it up first. There're too
many hogs," said Denning, whose herd size is dropping from
125 sows to 45.

The independents are the biggest losers as the swine industry
goes corporate. And as they disappear, a way of life is vanishing
with them.

Zering, the economist, believes some of the independents will
survive, but most will have to either get big or get out, partly
because the existing marketing system caters to very large producers.

There are only two major slaughtering plants in the state, Carolina
Food Processing Plant in Bladen County and Lundy's in Clinton.
Murphy's, Carrolls, Prestage and Brown's of Carolina have supply
contracts to provide animals to the packing companies on a regular
basis. Independent farmers say they sometimes face long delays
in trying to get their animals to market.

"The entire marketing system is changing to try to get rid
of the inefficiencies that existed in the past," Zering said.
"Being an independent in the sense that you could take five
hogs down the road in a trailer or sell them at an auction --
that system is gone."

But even independents that have tried to match the bigger operations
in size and technology find it difficult. The major swine producers
operate much more cheaply because they import their own grain
in bulk and mill it in vast company-owned grain mills.

More importantly, Big Pork has the financial resources to weather
extended downturns in the market -- for example, a plunge in wholesale
prices over the fall and winter that resulted in the lowest rates,
adjusted for inflation, since the Great Depression.

Hogs everywhere sold for a loss, but some of the integrated companies
are continuing to post profits.

Smithfield Foods Inc., the Virginia-based hog processor and producer,
announced earnings of $7.8 million for the second quarter of its
1995 fiscal year -- up from $923,000 in the second quarter of
fiscal 1994. The company credited an ample supply of hogs and
lower wholesale prices.

Pork prices at the grocery store haven't dropped.

Despite the lower prices and lack of market access, a few independent
producers are managing to hang on -- for now.

Otis Byrd, a 45-year-old Johnston County farmer, has deliberately
avoided contract production and says his main ambition is to simply
"make a living for my family." But the lack of a contract
is making it increasingly difficult to obtain loans or find a
market for his pigs.

"I don't know what I'm going to do to fight it, except keep
trying to raise hogs," he said recently. "I don't know
whether I'll be able to sell them. But I just ain't ready to roll
over and play dead yet."

"I do know there's something screwed up in the hog industry,"
he said, "and it's bad."